Consumption Over the Life Cycle: The Role of Annuities

Gary Hansen () and Selahattin Imrohoroglu ()

No 12341, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore the quantitative implications of uncertainty about the length of life and a lack of annuity markets for life cycle consumption in a general equilibrium overlapping generations model in which markets are otherwise complete. Empirical studies find that consumption tends to rise early in life, peak around age 45-55, and to decline after that. Our calibrated model exhibits life cycle consumption that is consistent with this pattern. This follows from the fact that, due to a lack of annuity markets, households discount the future more heavily as they age and their probability of survival falls. Once an unfunded social security system is introduced, the profile is still hump shaped, but the decline in consumption does not begin until after retirement in our base case. Adding a bequest motive causes this decline to begin at a younger age.

JEL-codes: E2 D1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2006-06
Note: EFG
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Journal Article: Consumption over the Life Cycle: The Role of Annuities (2008)
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